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The new market structure under MiFID II/MiFIR

The new market structure under MiFID II/MiFIR

Set in motion by MiFID in 2007, the objective of MiFID II/MiFIR has been to increase competition by creating a level playing field, enhancing efficiency by a defragmentation of markets and improving investor protection by expanding competent authorities’ overall supervisory capabilities.

In addition to being generally more definite, MiFID II/MiFIR also try to be appreciative of the significant technical progress of the financial industry since the implementation of MiFID I.


In that context, Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs) have been amended by a third category of trading venues. To subject the trading in non-equity instruments currently not conducted via RMs and MTFs to regulation, the so-called Organised Trading Facilities (OTFs) have been introduced. Where an investment firm deals on own account on an organised, frequent, systematic and substantial basis but outside a trading venue, the firm becomes a Systematic Internaliser (SI).

Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs)

According to MiFID II/MiFIR, a Regulated Market (RM) is a multilateral system that is operated or managed by a market operator and that brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments within the system. In contrast to Organised Trading Facilities (OTFs), RMs must execute transactions on a non-discretionary basis.

RMs provide a form of organised trading functionality very similar to that of Multilateral Trading Facilities (MTFs). However, operating an RM, unlike operating an MTF, is neither an investment activity, nor an investment service under MiFID II/MiFIR. However, requirements on the management eligibility and the operational set-up do not differ from the ones imposed on investment firms or induced by investment activities.

A Multilateral Trading Facility (MTF) is a multilateral system that can be operated by an investment firm or a market operator. Like an RM, it “brings together multiple third-party buying and selling interests in a financial instrument”. Like with RMs, transactions at MTFs may not be executed at their operators’ discretion. Not limited to specific types of instruments, neither RMs nor MTFs may trade on own account and against own capital – all points in which they differ from OTFs.

Organised Trading Facilities (OTFs)

With the Organised Trading Facilities (OTFs) an entirely new category of trading venues for non-equity instruments such as bonds, structured finance products, emissions allowances and derivatives has been introduced. Like the existing Regulated Markets (RMs) and Multilateral Trading Facilities (MTFs) for equity and equity-like instruments, OTFs may not execute orders against proprietary capital (except trading in sovereign bonds).

However, in contrast to RMs and MTFs, OTF operators may perform the execution of orders on a discretionary basis where compliant with pre-trade transparency requirements and unless acting against the interests of their clients – i.e. they have to adhere to the best execution regime. OTFs are free in placing or retracting orders and also with a view to the extent to which client orders will be matched within their system.

Reversely, OTFs may encourage negotiations between clients where they assume a common level of compatible interests between clients. An OTF is neither allowed to be a Systematic Internaliser (SI), nor to connect with one which could otherwise result in OTF orders and SI quotes or orders to interact. Also, it is not allowed for an OTF to connect with another OTF.

Systematic Internalisers (SIs)

Although not a venue in the classic sense of the term, the role of a Systematic Internaliser (SI) and the changes to the regime suggest discussing it in the venue context.

The original definition was introduced in 2007. Under MiFID I it has however been limited to trading in shares; there was also no quantitative specification as to when trading in certain instruments becomes systemically relevant.

MiFID II/MiFIR define SIs as “investment firms which, on an organised, frequent, systematic and substantial basis, deal on own account when executing client orders outside a regulated market, an MTF or an OTF”.

Most importantly, the ‘substantial basis’ will henceforth be calculated by either an investment firm’s over-the-counter (OTC) trading volume in a specific instrument vs. its total trading volume in this instrument or, alternatively, by an investment firm’s OTC trading volume in a specific instrument vs. the total trading in the European Union in this instrument.

Upon reaching or exceeding specific thresholds that effectuate the SI status, a number of transparency, best execution and reporting obligations applies. Investment firms have to make public quotes for liquid equity and equity-like instruments which they trade in their capacity as SIs. They have to execute the orders they receive from their clients in relation to financial instruments for which they are SIs at the prices quoted at the time of reception of the order.

Some exceptions may apply concerning trade volume and/or price. SIs must also provide quarterly reports concerning execution quality that include information such as price, date and execution venue, but also specific information such as outage times and number of failed transactions. In addition, they have to provide their competent authorities with reference data relating to those OTC derivatives for which they are SIs.

While subject to regulatory requirements, SIs are not allowed to bring together third-party buying and selling interests in functionally the same way as a trading venue.

Trading obligation

For derivatives that exhibit sufficient standardisation to be subject to the clearing obligation under EMIR, ESMA shall decide whether such derivatives should be subject to the trading obligation according to MiFIR which entails that financial counterparties will have to trade these instruments via RMs, MTFs, OTFs or equivalent third-country trading venues. Shares admitted to trading/traded on a regulated market arel no longer allowed to be traded on broker-crossing networks. Unless they are either non-systematic, ad-hoc, irregular and infrequent or take place between eligible/professional counterparties and do not contribute to the price discovery process, their trading must be conducted via an RM, MTF, SI or via a third-country trading venue.

Open access

Title VI of MiFIR provides rules for the non-discriminatory access to central counterparties (CCPs) and trading venues notably for transferable securities and money market instruments. In addition, the legislative provisions of Art. 35, 36 MiFIR include exchange-traded derivatives and take into account that forcing the interconnectedness of systemically important financial market infrastructures in derivatives could potentially pose threats to market integrity and stability, especially in distressed market conditions. Hence, mandatory access may only be granted where it would not threaten the smooth and orderly functioning of markets, in particular due to liquidity fragmentation, would not adversely affect systemic risk and would not require interoperability arrangements.

However, the transitional provisions in Art. 54 MiFIR provide the possibility for National Competent Authorities (NCAs) to postpone the application of the provisions in case of risks resulting from the application of the access rights under Art. 35 or 36 MiFIR to the orderly functioning of the relevant CCP or trading venue until 3 July 2019. Amidst the uncertainty of the future UK-EU27 relations, the 27 NCAs in the EU decided to make use of this possibility to avoid risks to financial stability in the EU. Given the prevailing uncertainty around Brexit and the unprecedented market turmoil due to the Covid-19 pandemic, the EU co-legislators decided in summer 2020 to expand this transitional period until 4 July 2021.

Third countries

Where firms from outside the EU (third-country firms) request access, i.e. intend to provide investment services or want to undertake investment activities within the EU, MiFID II/MiFIR differentiate between retail clients on the one hand and professional clients and eligible counterparties on the other hand. According to the Directive, where retail clients are involved, the EU Member State concerned may require the third-country firm to establish a branch within its jurisdiction and to acquire authorisation. This entails capital and governance requirements and subject the branch to MiFID II/MiFIR provisions. In addition, the Member State requires that there are bilateral agreements on supervisory and tax regimes in place between itself and the third country.

If investment services/activities address or involve professional clients and eligible counterparties, no branch establishment is required if the third-country firm has registered with ESMA, the firm is subject to supervision in its home country and ESMA has in place an equivalence agreement with the respective authority of this country.

The firm needs to inform clients that it is limited to this specific client group and that it is not subject to EU supervision. It must also accept to have legal disputes be settled at a court in a Member State. Where a third-country firm has established a branch in one Member State, there will be a passporting for other Member States within the EU if an equivalence agreement between ESMA and the third-country authority is in place.

Transparency Waivers

A – thoroughly deliberate – consequence of the implementation of MiFID I in 2007 was increased competition among trading venues. While pre-trade transparency requirements have existed since, so have exemptions. Four types of waivers have been in place, exempting firms from making their quotes public before the execution of the transaction: the reference price waiver, the negotiated trade waiver, the order management facility waiver and the large-in-scale waiver.

The reference price waiver for MTFs or RMs allows for orders to be matched at the midpoint of the best bid and offer price (with the best bid price being the highest binding bid price available in their order books and the best offer price being the respective binding lowest offer price), effectively granting the tightest spreads.

The negotiated trade waiver can be granted for transactions concluded at or within the current volume-weighted spread reflected on the order book or the quotes of the market makers of the RM or MTF operating the trading system or, where the share is not traded continuously, within a percentage of a suitable reference price, being a percentage and a reference price set in advance by the system operator. The waiver also applies to transactions which are subject to conditions other than the current market price of the equity instrument.

An order management facility waiver may be granted in relation to orders held in an order management facility maintained by the RM or the MTF unless they will be disclosed to the market.

The large-in-scale waiver is available where an order is considered to be “large in scale” compared with normal market size. This is the case if it is equal to or larger than the minimum size of order specified in the Annex to the MiFID II/MiFIR regulatory technical and implementing standards.

While the waivers entailed “dark pools” of large amounts of trading being conducted anonymously, regulators argued that the inconsistent and complex implementation of the waivers regime across venues has been unable to increase transparency and has weighed on price discovery process.

Double volume cap

Under MiFID II/MiFIR, the percentage of trading in a financial instrument carried out on a trading venue under the negotiated trade waiver and the reference price waiver are limited to 4 per cent of the total volume of trading in that financial instrument on all trading venues across the EU over the previous twelve months.

At the same time, the overall EU trading in a financial instrument under those waivers may not exceed 8 per cent of the total volume of its trading on all venues throughout the EU over the previous twelve months.

These caps are measured against a rolling twelve-month period. ESMA is mandated with publishing and updating this data on a monthly basis; prior to this, it has to collate this data from the respective reports filed by the competent authorities which granted the waivers to firms which have to report to ESMA.

DBG responds to ESMA’s consultation on the transparency regime for equity and equity-like instruments

In this consultation, the ESMA asked relevant stakeholders for their opinions on proposed changes to the transparency regime aiming at simplifying it while increasing the overall transparency of the market.

DBG responds to ESMA’s consultation on the transparency regime for non-equity instruments

The response given by DBG can be accessed here, outlining how transparency in the non-equity space can be increased through targeted changes that allow for a natural migration of volumes to the regulated environment. The response given by DBG can be accessed here, outlining how transparency in the non-equity space can be increased through targeted changes that allow for a natural migration of volumes to the regulated environment.

DBG responds to ESMA’s consultation on the transparency regime for Systemic Internalisers

The response given by DBG can be accessed here in which DBG agrees with ESMA’s findings that no increase in transparency has been triggered by MiFID II for SIs and that an unlevel playing field exists between SIs and MTFs.

DBG responds to ESMA’s consultation on the OTF regime

ESMA has started the process to review the usefulness of the OTF regime and the current OTF landscape. The consultation can be accessed here. Please read more here about the DBG response.